Markets are inflated, and it’s made the stuff they own way more valuable

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The new World Inequality Report shows mass disparities between the rich and the poor globally when it comes to income and wealth.Guido Mieth

  • A report on global wealth inequality shows that the wealth gap has grown dramatically in the last 20 years.

  • It also shows a key reason why: The wealthy simply hold more financial assets, like stocks.

  • The report argues inequality is a policy choice. Meanwhile, US stocks have been inflated by monetary policy, and they also aren’t taxed like income.

It’s well-documented that the rich are getting richer, and the poor continue to have very little wealth — and that the pandemic made the situation worse.

The World Inequality 2022 Report strengthens this evidence. The new analysis, led by the prominent economist and inequality expert Thomas Piketty, draws on two decades of data on wealth and income inequality across the globe to show massive wealth disparities between the rich and the poor globally.

“The poorest half of the global population barely owns any wealth at all, possessing just 2% of the total,” Piketty and his co-authors wrote. “In contrast, the richest 10% of the global population own 76% of all wealth.”

A big reason why that gulf has widened in the post-COVID era is that markets are inflated right now. The stock market is hovering near record highs, with the S&P 500 up 25% this year and 110% since recent lows in March 2020. Home prices are growing at a rate not seen in a half-century.

In short, financial assets are extremely valuable right now. That’s good news for the richest 10% of the country, who derive a significant portion of their wealth from these swelling valuations.

Helping Wall Street during the pandemic revived the economy — but also widened the wealth gap

Stimulus initiatives enacted by both the Trump and Biden administrations to rescue the economy and stabilize civilization ended up indirectly playing a key role in the inflation of these financial assets.

By slashing interest rates to near zero, the Federal Reserve gave corporations the opportunity to raise massive amounts of debt at favorable terms. Those firms then deployed that capital in ways that boosted their future profit-growth prospects — and, by extension, their stock prices.

The monetary-policy shifts that accompanied stimulus also gave already-wealthy people the opportunity to take advantage of record-low mortgage rates, which in turn started the inflationary cycle seen in the housing industry.

Put simply, the Fed’s necessary intervention has been great for financial assets and the wealthy people that own the majority of them.

Billionaires often invest in individual companies, or portfolios of investments in hedge funds and private equity, which have also been a major source of their skyrocketing wealth. As of October, US billionaire wealth surged by 70%, or $2.1 Trillion, during the pandemic, according to Forbes data analyzed by Americans for Tax Fairness (ATF) and the Institute for Policy Studies Program on Inequality (IPS).

There’s substantial evidence showing that the decisions the Fed made last year were necessary to stabilizing the economy early in the pandemic. But looking under the hood of why the rich are getting so much richer now shows how that widening income gap is a byproduct of the central bank’s post-COVID support.

While the world’s richest individuals tend to hold a large share of the wealth in readily appreciating financial assets, the very poor generally deal in cash or bank deposits, the report finds. People at the bottom of the wealth-distribution scale may have land and houses, but the market value of those isn’t significant. The middle class typically holds bank deposits and real estate, and equity and bonds often make up a small portion of its wealth.

For the rich, however, financial assets make up about 40% to 60% of their wealth. Generally, the richer people are, the higher the portion of financial assets in their wealth. That means they hold more bank deposits, stocks, and bonds than other classes.

The main goal of the Fed’s policies last year was to help stabilize the economy during the pandemic. Although those policies are receiving more scrutiny now for how they may have exacerbated the wealth gap, they were praised at the time for steering the country clear of financial crisis in the first year of the pandemic. It pushed down long-term interest rates, provided liquidity to help corporations borrow and banks lend. The Dow Jones Industrial Average regained half its losses by mid-April and rose to record highs by early September.

And that’s been helpful for average consumers as well. The Fed kept consumer credit available and interest rates on mortgages and credit cards low. In addition to helping corporations avoid bankruptcy, the Fed prevented job losses.

The stimulus payments distributed under the Biden and Trump administrations also led to economic growth since the start of last year. The money allocated by the CARES Act was estimated to have increased the US’ economic output by 0.6% in 2020, according to the Congressional Budget Office.

These moves also helped stocks recover, as investors revived the market during a time the bond market wasn’t yielding much. America’s household wealth hit a record high in the third quarter of year, hitting $123.52 trillion as the wealthy profited from a recovering stock market.

But as previously mentioned, most Americans don’t own stocks. And a year and a half after the Fed supported Wall Street with an influx of cash, Americans are suffering from the resulting 30-year inflation high.

The World Inequality report ultimately found that these disparities were avoidable to a degree, partly from the government’s reluctance to tax the wealthy more.

Financial assets like stock, for instance, are taxed differently than income, which means that the richest Americans are taxed less for the ways they accrue wealth. As Insider’s Juliana Kaplan has reported, capital gains taxes are triggered only when an asset is sold, so if a rich person lets their stocks or bonds accumulate — and those assets have accumulated an incredible amount the last two years — their wealth on paper grows untaxed the whole while.

“These differences … confirm that inequality is not inevitable, it is a political choice,” the report says.

Read the original article on Business Insider

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